Friday, December 23, 2011

The ITC is tough terrain for mobile patent plaintiffs -- consistently so far

This week's ITC decisions involving various of Apple's and Microsoft's patent infringement claims against Android were important, but every time the ITC rules on one of those smartphone patent cases, I am less surprised than before about the high drop-out rate of patent claims. That doesn't mean that those decisions don't matter. It's just that the ITC is ever less likely to become a forum that would singlehandeldy force, through its decisions, the relevant parties to settle their disputes.

As an analyst I have to recognize new trends and digest information, and to adjust my positions accordingly. It's not just that I have to -- I thoroughly enjoy it. Almost 15 months back, I wrote an article on the role of the ITC as an increasingly popular patent enforcement agency, and I have linked to it on a number of occasions ever since. In principle, I still stand by the information in that article, but since then, I've seen a number of smartphone-related ITC positions (recommendations as well as preliminary and final decisions) that show it's a huge gamble for patent holders to take their claims there.

It can be a fast avenue to favorable decisions, and that's really tempting, but at least in connection with smartphones, there's also a high risk of the ITC's actions creating a perception of some patents or patent portfolios being less powerful than they actually are. We'll still hear a lot from and about the ITC in 2012 (complaints, hearings, recommendations and decisions), but I wouldn't be surprised if some major patent holders now adjusted their litigation strategies and deemphasized ITC complaints in favor of actions in United States district courts as well as foreign courts. It's not just that it's hard for anyone to win there: it also takes longer. Apple's complaint against HTC was brought in March 2010 and finally adjudicated 21 months later. During that period, Apple could have completed two full subsequent rounds of litigation in Mannheim and Munich, and would only be a few months away from decisions on a third round. Also, a decision on an Eastman Kodak complaint against Apple and RIM, filed almost two years ago, just got pushed off by nine months. And when the ITC opens new investigations, it recently set 18-month target dates from the beginning, counting from the launch of the investigation (about one month after the complaint) and likely being subject to further delays.

If I were a conspiracy theorist, I could think of a many possible explanations. For example, with the ITC clearly aching under its huge caseload, one might speculate whether it actually hopes plaintiffs-to-be recognize that all their lawsuits slow down the process, hoping that this -- rather than more taxpayers' money for the agency -- will ultimately redress the balance between supply and demand. But let's be deferential to the ITC, which has an important task, and focus on the hard facts here.

One of the hard facts is also that fending off an ITC complaint in whole or in large parts still takes hard work. None of this is meant to diminish the defensive achievements of the respective defendants. Let there be no doubt: HTC and Motorola have reasons to be proud of the work they've done, and happy about the fact that they've contained the damage for the most part -- and for now. Their disputes are far from over, but things could have been much worse for them. That said, at the ITC it's undoubtedly the complainants who face an uphill battle, and the level of expectation of independent observers is rather low now.

Maybe it wouldn't have been easier to win at the ITC in previous years. But the rate of settlements is conspicuously low in connection with smartphone patent disputes, so there are more decisions relative to the number of compaints, and those decisions don't serve to facilitate settlements.

Here's a chronology of ITC smartphone decisions and recommendations that came down since my aforementioned October 2010 article -- I decided not to produce a table (patents asserted, enforced, dismissed) because the specifics of each case must be taken into account:

January 2011: in investigation no. 337-TA-703, then-chief ALJ Paul Luckern finds no violation of a key Eastman Kodak patent on digital imaging by Apple and RIM. 13 months earlier, a different ALJ had made an initial determination that held Samsung and LG (which settled at about that time) to infringe that patent.

July 2011: an ALJ believes Apple infringes two S3 Graphics patents (out of four asserted ones). Those two patents are closely related to each other, which makes it more like a potential win on several claims from the same patent. Shortly thereafter HTC announces the acquisition of S3G. The companies had a major shareholder in common. But it turns out that Apple's core products aren't suspected of infringement, and in November 2011, the ITC concludes a review with the complete dismissal of the complaint.

July 2011: the ALJ in charge of investigation no. 337-TA-710 makes an initial determination that HTC infringes on two of Apple's ten originally asserted patents. But this determination is reviewed, and this week one of those two patents was found infringed and the other was not (or it was considered invalid).

I think the situation between Nokia and Apple was an interesting one. Both companies were heading toward a "goalless draw" (though Nokia still had some hopes that a review of the initial determination might improve the outcome). The ITC, which has the job of protecting the domestic industry against unfair competition from imported products, didn't make things easier for the U.S. company than for its Finnish competitor. Both parties' claims got a rough ride.

The ITC can uphold and protect intellectual property in connection with smartphones since those devices are all manufactured outside the United States, even if their makers (like Apple and Motorola) are based in the US. At any rate, the dispute between Apple and Nokia is a good example of the ITC being a consistently difficult forum for all patent holders rather than pursuing a protectionist agenda. It has certain policies and all the time stakeholders try to sway the ITC on non-legal or pseudo-legal political grounds, but it doesn't disadvantage foreign companies. For example, Samsung doesn't have to be afraid of the ITC playing favorites with Apple. That dispute is taking place in ten countries and in the end neither litigation in the U.S. nor in South Korea (Samsung's home country) is likely to decide the overall outcome. That one will likely depend in no small part on jurisdictions like Germany, France and Australia, or any other of the ten countries in which they're suing each other.

In general, I like it when courts or quasi-judicial agencies set a reasonably high bar for patent infringement claims to succeed. On this blog I have repeatedly criticized judicial decisions that set the bar too low. The ITC may set it too high, considering that its primary task is the effective protection of intellectual property. But if we all look back at the ITC's role in a year or so, we may once again see the same consistent pattern that I just discussed -- possibly with adjustments where the merits of certain cases warrant it, but the ITC is probably going to continue to dismiss the vast majority of smartphone patent claims brought before it.

District courts and similar courts in other countries are in a different position. After they rule, stakeholders can ask for changes to the law, but they can't ask political decision makers to overrule. With the ITC, which is a government agency, there are political challenges, somewhat similar to the ones that antitrust regulators also face all the time.

Any recommendation of an import ban is subject to a Presidential Review. While U.S. presidents frequently delegate this to the U.S. Trade Representative, and even before the first smartphone-related import ban was handed down, leading U.S. carrier Verizon asked President Obama to veto any bans. Verizon knows there are many cases pending in U.S. district courts, and there will be injunctions by such courts at some point, but its political call related only to the ITC. And as I explained, the ITC's decisions don't provide the slightest indication of any such thing as protectionism (if one wanted to accuse them of anything, it would have to be the opposite), but if foreign nations thought their companies are treated unfairly, they would likely complain through diplomatic channels and their impressions could influence their own trade and IP enforcement policies.

In light of that, it's often the safest and easiest bet for the ITC to take skeptical positions on patent claims (though that also had political repercussions in connection with the Kodak case). I guess the ITC really hopes to avoid that it orders an import ban on a patent that might be invalidated shortly thereafter. There isn't going to be much of a public debate over whether the ITC has recently struck the right balance. That's outside of my focus, too. But I do take note of its decisions, and just the ones I listed above involve a number of major players and dozens of patents, and chances are that those complaints would have been considerably more successful in district courts and definitely in certain international courts.

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About Me

Florian Mueller used to be an award-winning intellectual property activist. His 30 years of software industry expertise span different market segments (games, education, productivity and infrastructure software), diverse business models, and technical and commercial areas of responsibility. In recent years, Florian advised a diversity of clients on the patent wars surrounding mobile devices, and on their economic and technical implications. (In order to avoid conflicts of interest, Florian does not hold or initiate transactions in any technology stocks or derivatives thereof, except that he is long AAPL.) He is now developing games for smartphones and tablet computers.